In today’s corporate arena, fraud has taken its seat among the top priorities of those who make policies and set standards. The majority of large-scale fraud is perpetrated by the improper recognition of company revenues and is, in practice, generally simple. Revenue recognition fraud can be carried out by keeping the books open past the end of the accounting period, recording consignment goods as sales, improper bill-and-hold transactions, failure to record offsetting accruals, and many other methods that boost earnings. Internal auditors need to understand the types of revenue recognition fraud and the internal controls that prevent the use of improper techniques. This knowledge will allow them to help management and the board of directors in protecting the reliability of financial reporting.
Techniques for Revenue Recognition Fraud
Revenue recognition fraud is not always difficult to understand. In many cases it’s rather easy to see once someone points it out. In his article “Timing is of the Essence,” Joseph T. Wells explains that the most common method of revenue recognition fraud is holding the books open past the end of the accounting period. He states, “proper accounting cut-off tests prevent most of these problems, but not all,” [Wells 2001]. He goes on to explain that companies can stop time clocks and continue shipping goods until sales targets are met, but competent auditors should notice that something obvious or at least suspicious is happening. Playing with time is not the only way to improperly recognize revenue.
Another way to commit revenue recognition fraud is by recording goods on consignment as sales. Consignment goods are those that a party ships to a selling agent. The shipment of these goods to the selling agent should never be recorded as a sale because they are still inventory of the consigning company. This method of revenue recognition fraud is detected by the reversal of...